Why are some landlords leaving the Buy-to-let market?
Due to its potential to generate substantial returns in a fairly short period of time, buy-to-let was once a hugely popular investment option.
But we’re increasingly seeing landlords leaving the market, which in turn is leading to a shortage of rental housing at a time when many people can’t afford to buy a property.
So what factors are driving this exodus from the buy-to-let sector?
Rising interest rates
Interest rates have been creeping up since December 2021, as the Bank of England has been pulling this lever in an effort to tackle inflation.
The Royal Institution of Chartered Surveyors (RICS) is among those who believe this is one of the key factors driving landlords to leave the sector and sell up.
Meanwhile, real estate company Savills believes rising interest rates have contributed to average net profits for landlords falling to their lowest level since 2007. This, the company stated, means that following a “boom period” for landlords, 2023 marks a “turning point” for the private rented sector.
Lucian Cook, head of residential research at Savills, said: “Between 2014 and 2021, landlords on average were making ‘year 1’ cash profits of 23 per cent of rental income, but successive interest rate hikes have seen this figure plummet to under four per cent this year.”
End of no fault evictions
Plans to scrap “no fault” Section 21 evictions, outlined in the Renters Reform Bill, have prompted many buy-to-let investors to consider their position.
As the law stands, private landlords in England and Wales are allowed to evict tenants and repossess their properties because they want to, rather than because the tenant has been at fault in any way. If the tenant refuses to move out, landlords can then apply to a housing tribunal for an eviction order.
According to the proposed legislation, ending Section 21 evictions will “provide greater security for tenants, while retaining the important flexibility that privately rented accommodation offers”. Landlords, meanwhile, will only be able to evict a tenant in reasonable circumstances, which will be defined in law.
Ageing landlords retiring
Buy-to-let property really took off as a popular investment option around the turn of the millennium. But that’s around a quarter of a century ago now, and many landlords who entered the market then are getting older and thinking about retirement.
According to Savills, nearly two million buy-to-let properties are currently owned by 620,000 landlords aged 65 or above, while a similar number are owned by landlords aged between 55 and 64.
If the supply of buy-to-let property continues to lag behind demand, tenants who can’t afford to get on the property ladder will ultimately find themselves with far less to choose from.
As Lucian Cook of Savills points out, that in turn means available stock is more likely to be let out to tenants “who are better paid and in more secure employment, inadvertently hitting less affluent households”.
It’s clear that more needs to be done, firstly to increase rental supply, and secondly to reassure existing and prospective buy-to-let investors that rental property remains an attractive and lucrative investment option.
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Sam Murphy – 6th July 2023
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